Earned Value Management


Imagine that you are in an elevator with the CEO of your company, and he/she asks how your big project is progressing. Being in the elevator gives you only 30 seconds to respond. Did you know you can provide a very detailed answer regarding the cost and schedule performance in one quick sentence? Earned Value Management can be used to answer that question.

Elevator

Earned Value Management (EVM) is a tool that can summarize the health of a project into two key numbers. It begins with an estimate of the Earned Value (EV), which is an estimated value of the work actually completed to date. Earned Value Management compares how much money has been actually been spent versus the project plan, and how much has been accomplished to date versus the project plan. The project health can be summarized using the following:

Cost Performance Index

The Cost Performance Index (CPI) is a value relative to the number 1 that communicates how much has been spent on a project relative to the plan.

CPI = 1 :      The project costs are equal to the project plan.
CPI is greater than 1 (Good) :     Less money has been spent on the project than originally planned.
CPI is less than  1 (Bad) :     More money has been spent on the project than originally planned.

The Cost Variance (CV) is the difference in cost between the Actual Cost (AC) of the project and the Earned Value (EV) at a given point in time. These two values are used to calculate the CPI. As shown in the graph below, if the actual cost of the project is greater than planned, the project is on track to be over budget. The greater the variance, the further the the CPI is from the number 1.

Schedule Performance Index

The Schedule Performance Index (SPI) is a value relative to the number 1 that communicates how much has been accomplished on a project relative to the plan.

SPI = 1 :      The project work completed to date is equal to the project plan
SPI is greater than 1 (Good) :     The project is ahead of schedule
SPI is less than  1 (Bad) :     The project is behind schedule

The Schedule Variance (SV) is the difference in cost between the Earned Value (EV) of the project and the Planned Value (PV) at a given point in time. As shown in the graph below, if the earned value of the project is less than planned, the project is behind schedule and will take longer than expected and cost more as result. The greater the variance, the further the SPI is from the number 1.

 

Earned value management can summarize a project down to two numbers

Earned value management can summarize a project down to two numbers

The following is an example to show how to calculate the Cost Performance Index and Schedule Performance Index of a project.

You are in the middle of a project and originally had planned for the project to cost $49,000 to date. You’ve tracked the project, and see it has costed $60,000 and that the value of the work completed is $50,000.
Earned Value (EV) = $50,000
Planned Value (PV) = $49,000
Actual Cost (AC) = $60,000
Cost Variance (CV) = EV – AC = $50,000 – $60,000 = -$10,000
Schedule Variance (SV) = EV – PV = $50,000 – $49,000 = $1,000
Cost Performance Index (CPI) = EV / AC = $50,000 / $60,000 = 0.83
Schedule Performance Index (SPI) = EV / PV = $50,000 / $40,000 = 1.02
In summary, the project has spent more than planned to date, but is very slightly ahead of schedule.

 

There are a set of formulas for calculating Earned Value Management which allow one to forecast the project costs and completion date based on the performance to date. It is beyond the intent of this site to describe the details, but I’ve included the some of the formulas to give an idea of calculations that can be performed.

  Description Formula
BAC – Budget at Completion Original planned budget for the project
PV – Planned Value Value of the work that was originally planned to be completed
AC – Actual Cost Actual cost of the work that has been performed to date
EV – Earned Value Estimate of the value of work completed to date
CV – Cost Variance Variance between the actual cost spent and the planned budget CV = EV – AC
SV – Schedule Variance Variance between the value of the work completed versus what was planned to be completed at this point SV = EV – PV
CPI – Cost Perf. Index Above 1 = under budget (Good) , Below 1 = over budget (Bad) CPI = EV / AC
SPI – Schedule Perf. Index Above 1 = ahead of schedule (Good) , Below 1 = behind schedule (Bad) SPI = EV / PV
EAC – Est. at Completion Estimate of the final project cost based on the budget performance to date EAC = BAC / CPI
EAC – Est. to Complete Estimate of the remaining costs to complete the project ETC = EAC – AC
VAC – Variance at Completion Difference between the original planned budget and the estimated cost at completion VAC = BAC – EAC

 

 

Leave a comment

Your email address will not be published. Required fields are marked *